Could the US suspend payments due to political division?

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It is not a new risk, but every time it reappears, the economic world takes a small step into an uncharted abyss. The usual thing is that it’s almost in the extreme Demogorgon You may not have finished leaving your other dimension, but there are reasons to believe that maybe it will be different this time. The possibility that the US will suspend the payments because Democrats and Republicans disagree on a purely administrative measure remains unresolved.. US Treasury Secretary Janet Yellen warned this week that it would be an “economic and financial disaster”. A powerful earthquake leads to a global recession.

The time to reach an agreement is running out. The deadline, which was sent via letter to members of Congress, is June 1. The government is withdrawing from tax collection to pay bills, salaries, aid and debts… But there is not much margin left and real problems are expected with the onset of summer. The limited state the US economy is in has nothing to do with its state of health. The country is growing, the unemployment rate is at a minimum, businesses are doing well… The largest economy in the world clearly has the capacity to meet its obligations. Rather, it is a matter of political blockade.

“The passive so-called debt ceiling rule combined with an unprecedented level of political polarization makes for a toxic mix. It could seriously destabilize international financial markets, generate a global recession and call into question the dominant role of the dollar.” Judith Arnal and Federico Steinbergresearchers from the Elcano Royal Institute, in a recent analysis.

the Dollar making machine It cannot continue to operate if the US Congress does not authorize the current debt ceiling to be exceeded. “This does not mean authorizing new spending, it simply allows the federal government to borrow to pay for spending programs approved by Congress.“If inflation is 5% and the economy is growing, the debt limit will have to be constantly revised,” say Javier Quesada, a researcher at IVIE.

The US central bank is also looking at a tense outcome in the US central bank. Many members of the Federal Reserve (Fed) have warned of this almost unimaginable abyss. during the last meeting. “We shouldn’t even be talking about a world where America doesn’t pay its bills.Jerome Powell, Chairman of the Federal Reserve, responded on May 5 “And no one should assume that the Fed can really protect the economy, the financial system and the blow to our reputation around the world from this situation.”

What could happen?

Whether or not it is an official default, the mere fact that this possibility exists could cause interest rates on US debt to skyrocket. On other occasions, long before they stopped returning money to investors, it was decided to prioritize expenses. “You start by announcing a government shutdown. That means stopping the provision of some public services. For example, national parks and other non-vital facilities are not opening. This pressure environment is created so that the spending cap is adjustedThe clip recalls the last similar episode in 2013.

In theory and on paper, if the United States can’t make all of its payments, what happens?

The dollar is also an international reference currency. “60% of international monetary reserves are held in dollarsrecall Arnall and Steinberg, who also refer to the geopolitical derivative at a time when China is trying to position its own yuan as the international reference currency.

“The dominance of the dollar is so high that a debt default, even if reversed within a few days, could create enormous pressure on global financial stability, as well as potential trade disruptions.” J. Arnal and F. Steinberg

The political blockade is a result of polarization

The key is in the House of Representatives, where the Republicans have 222 members of Congress to the Democrats’ 213. This is not the first time a president without control in Congress has faced this situation of raising the spending cap. Barack Obama has already suffered twice. The agreement came to an extreme.

“Since 1960, the debt ceiling increase has been passed 78 times: 49 under Republican presidents and 29 under Democratic presidents. However, in recent years, what constitutes A procedural issue turned into a political battleArnall and Steinberg point out that the degree of polarization makes agreement more difficult than ever.

He answers: “Obstruction of the administration’s work in the United States is one of the classic examples of polarization.” Louis Millersociologist, CSIC researcher, and author polarized. The politics that divide us. “Now it is more serious because it is not that the parties are ideologically far apart, but that Confrontation is based on identity, and there are no longer axes in which you can reach agreements. When it comes to finding solutions to polarization, we have to go back to institutional designs that don’t depend on agreement between the parties,” says Miller.

The US spending cap has been an anachronism since 1917 and is still valid This is meaningless. No other developed country needs congressional authorization to increase its debt and financing expenditures that have already been approved by the same chamber.

Joe Biden’s government may have to explore alternative and unknown solutions. None of the things considered are simple and free of risks and costs. “Some options are realistic, though they may be very expensive from a political point of viewAmong them, Elcano researchers noted, would be giving in to the cuts demanded by the Republicans, resorting to the Fourteenth Amendment to the Constitution, or changing the delinquent debt to another with more interest to get more money.

It should also be borne in mind that there are political incentives on both sides to not reach an agreement. “It wouldn’t be strange if the Republicans wanted to force it To prove the Democrats mismanaged and lead strongly in the 2024 election,” says one analyst. And vice versa: If there is a default on debt, public wages, and social services, Democrats can use it to prove that Republicans do not take care of the middle classes.

time is running out. If the political competitors do not agree, we will have to entrust ourselves to the highest levels. Paraphrasing the inscription on the dollars themselves: “We trust in God(In God we trust).